How to best invest a lump sum

Q: I'm 63 and looking to retire at the end of 2013. I'd like to top up my pension and have a lump sum of around £50,000 to invest.

Could you give me some ideas as to where I could invest to give me a monthly supplementary income to boost my pension? I'm not prepared to take any high risks with this money.

A: Philip Pearson is a partner at P&P Invest in Southampton.

With interest rates at a historic low, the returns from an easy-access savings account averages at 0.93%, so you should consider an alternative to cash for the majority of the £50,000.

However, if this is your only savings, then allocate £5,000 as a contingency fund against uncertainties. This should stay in a cash ISA or, if you've already used your allowance, in a savings account.

With inflation at 2.7%, as measured by retail prices index (RPI), you need a rising income over your retirement to combat the rise in the cost of living.

The best way to achieve this would be through a portfolio of fixed-interest and UK equity income funds, in a stocks and shares ISA where up to £11,520 can be invested each year, or £5,760 if a cash ISA has already been used.

After you've used up this allowance (and put £5,000 in an easy-access savings account), you'll have nearly £34,000 spare. Collective funds, like unit and investment trusts, are ideal as they spread risk through diversification, and when selected outside of a stocks and shares ISA, accumulate capital growth free of tax.

This means they grow tax-free until you cash in the profits. Don't forget your capital gains tax (CGT) allowance each year is £10,900 (2013/14), so you'll only pay tax on interest above this.

You can reduce the CGT you have to pay by using a process known as 'bed and ISA'. This is where you sell your investments then reinvest part of them, up to the ISA allowance, into your ISA at the start of the next tax year.

Your ISA manager should be able to do this for you at no cost, provided you buy back the investments within the next 30 days.

If you don't have experience in investing in the stockmarket, a good starting point would be the Fidelity Moneybuilder range of funds. These offer good value, with no initial charge to invest, and can provide a high income with scope for capital growth.

Blend Fidelity Moneybuilder Income with Fidelity Moneybuilder balanced fund. If you do this, you'll get an average income of around 4% on a monthly basis, which is approximately four times that available from deposit accounts at this time, but with a limited amount of risk.